Guarantees: are they enforceable if your co-guarantors don’t all sign?

October 2013

Reading time (1-10 minutes): 3 minutes
Sophistication level (1 (idiot) – 10 (expert)): 5
Entertainment value (1 (turgid) – 10 (side-splitting)): 5

When banks ask for guarantees, their documents tend to be pretty watertight so they are hard to escape from. But did the bank here manage to slip up?

Background:

When people (‘guarantors’) give a joint and several guarantee it means that the person they give the guarantee to (whom I guess you call the ‘guarantee’, which can be confusing so let’s call it the creditor) can go against any one of the guarantors for the full amount without having to chase any of the others. If the guarantee is worded in a singing and dancing way so that the guarantor is a ‘primary obligor’ it means that the creditor doesn’t even need to chase the original debtor first. Of course, it makes sense for a creditor to go against whoever has the most readily available money.

Usually a legal document comes into effect on the day when the last party signs and delivers it.

Facts:

Dunbar Assets Plc lent money to a company for a property development. As part of the deal John Harvey and three others were required to give a joint and several guarantee. They all signed a ‘composite’ document, ie one document to which they were all parties, and in which the four of them were described together as ‘the Guarantor’.

The development failed and Dunbar went after the guarantors. Of course that’s when guarantors try to wriggle out of things.

Mr Harvey’s first argument didn’t work very well. He said that before he signed the guarantee Dunbar had promised that it wouldn’t enforce the guarantee against him. So he claimed something called promissory estoppel. The court said he couldn’t.

But then in an interesting twist it transpired that one of the other co-guarantors, a Mr Lenny, hadn’t actually signed the guarantee. His signature had been forged by someone. Mr Harvey claimed that because the four guarantors didn’t all sign the guarantee it never came into existence. The High Court said that it had and that the three signatory guarantors were jointly and severally liable. One of the things the court looked at was a clause in the guarantee which said that any failure by Dunbar to take fully any security contemplated or agreed to be taken for the development company’s obligations wouldn’t operate to discharge or reduce any of the obligations of ‘the Guarantor’.

Mr Harvey appealed to the Court of Appeal, which overruled the High Court judge. It ruled that since the guarantee was a single composite document which defined all four guarantors as ‘the Guarantor’ the execution by all four of them was an essential condition to its enforceability.

Musings:

It’s a good thing I didn’t do an article about this case a few months ago, as the Court of Appeal overruled the original decision which I was going to report on!

Many bank guarantee documents define a group of guarantors together as ‘the Guarantor’. Will they change the way these are worded after this case?

I wonder what would have happened if much later in the day (perhaps even after the development had failed and Dunbar had started proceedings against the development company?) Mr Lenny had agreed to sign the guarantee (perhaps after being promised he wouldn’t be chased under it?!). Would it then have become enforceable against all four of the guarantors?

To some extent it shows that these things are a lottery. The law isn’t simple. The commercial courts are full of cases that different solicitors, different barristers and different judges will have different conclusions on. Each case has its own different facts, which makes it hard to draw simple conclusions from what a court might have ruled in a different case based on slightly different facts. It’s far better to try to get your ducks in order as far as possible and be very careful as to how you put together and document your business dealings, rather than rely on an expensive and uncertain legal process.

Case: John Spencer Harvey v Dunbar Assets Plc [2013] EWCA civ 952